Definition
A bond issued by a state, city, or local agency to fund public projects. The interest is generally exempt from federal income tax, and often from state tax for in-state residents, which is why munis pay lower stated yields than comparable taxable bonds.
Why it matters
Munis are a tax-bracket play: the exemption is worth the most to high earners holding bonds in taxable accounts, and worth nothing inside an IRA or 401(k), where everything is already sheltered. The comparison tool is tax-equivalent yield.
Example
An investor in a 35% bracket compares a 3.5% municipal bond with a 5% corporate bond. The muni's tax-equivalent yield is 3.5% divided by 0.65, about 5.4%, so the muni wins after tax despite the lower sticker yield. Inside their IRA, the corporate bond's full 5% would win instead.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.